Transcript Applying Trading Techniques

Agribusiness library
LESSON 060064: Applying Trading Techniques
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Objectives
1. Identify reasons for using futures in agricultural
marketing.
2. Determine what to consider when selecting a
broker.
3. Determine how to place various types of orders.
4. Investigate the role of a performance bond
deposit and bond calls.
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Terms
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breakeven cost
broker
brokerage fee
buy stop
Commodity Futures
Trading Commission
market order
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performance bond
performance bond call
price order
sell stop
stop close only
stop order
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Why are futures used in
agricultural marketing?
Since the marketing of products can mean the
difference between making money and losing
money on commodities, it is essential. Many
marketing decisions need to be made to ensure
existence of the business. Not everyone uses
futures to market or buy products. Using or not
using is a decision that people have to make when
considering their circumstances.
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Why are futures used in
agricultural marketing?
A. Prices fluctuate based on many variables. Most of
them are out of the control of buyers and sellers.
For example, weather, other markets, and seasonal
prices cannot be regulated. There may be an effect
on the yield and cost of production, but even these
partially controllable factors can vary.
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Why are futures used in
agricultural marketing?
1. Many commodities follow a seasonal price pattern
based on supply and demand.
a. If there is increased supply and the demand stays the
same like at harvest, the price tends to go down.
b. If there is decreased supply and the demand stays
the same, the price will go up.
2. By watching the harvest time and the anticipated supply,
it is possible to guess what the
market will do.
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Why are futures used in
agricultural marketing?
3. Unfortunately, there are less predictable markets (e.g.,
livestock). Even by watching pricing trends for many
years, people cannot always accurately predict what the
market will do.
a. One year spring may be the highest
price season for hogs, and the very
next year the spring price may be
the lowest of the year.
b. The only consistent thing is that the
price tends to follow a cycle.
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Why are futures used in
agricultural marketing?
4. By researching previous cycles, people may be able to
more accurately predict market prices.
5. Overall, the largest thing to consider is the relationship
between supply and demand. In the more recent years,
this is even volatile because of world markets
contributing to the setting of U.S. prices.
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Why are futures used in
agricultural marketing?
B. Producers of the products have little control over
market prices.
1. They can make decisions on producing or not
producing based on production costs, but no one
farmer can determine the market price.
2. If the business is small, the producer may not be able
to turn a profit based on operating costs compared to
a large business or vice versa.
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Why are futures used in
agricultural marketing?
C. Many marketing tools exist, so it is difficult to
determine which one is best for an individual. Some
tools are:
1.
2.
3.
4.
5.
6.
Weather forecasts
Foreign market analysis
Cash contracts
Futures markets
Price of production
Price of storage
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Why are futures used in
agricultural marketing?
D. The most important thing to consider is the
breakeven cost—the amount needed from the
sale of the product to break even in comparison to
the input costs.
1. By using cash and futures contracts, a person can
lock in a price that he or she knows is profitable to
the business.
2. He or she may sell for less than market price in the
end, but the amount is guaranteed to cover the cost
of production.
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Why are futures used in
agricultural marketing?
E. By utilizing product development research and
marketing research, an individual can better
determine what products consumers want.
1. It is important to look at where the demand will be
the greatest now and in the future.
2. If a person does not stay informed with consumer
demands and more efficient ways to produce
products, he or she may not stay competitive in a
volatile market.
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Why are futures used in
agricultural marketing?
F. Assuming that the business goal is to obtain
maximum profit, a person may need to use several
different marketing tools. It is important to realize
that the person will not always receive the
maximum price for the product, but there are
several ways that he or she can prevent the
business from taking a loss.
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What should be considered when
selecting a broker?
Most futures trading is conducted over the phone
with a broker, so an individual must ensure that
the broker will offer honest and knowledgeable
advice. In addition, it is important to know that the
broker will do exactly what was asked of him or
her. A broker is an individual who acts on behalf
of a client who is buying or selling
futures or options contracts and more.
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What should be considered when
selecting a broker?
A. An individual must first consider—when selecting a
broker—what he or she wants to trade.
1. Many brokers specialize in one commodity or another
and can better meet certain needs because of
extensive knowledge of a specific commodity.
2. Some situations have specific rules and regulations on
contracts. A broker who is familiar with the
commodity will know these issues more extensively.
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What should be considered when
selecting a broker?
B. Trust must be considered.
1. If an individual does not trust a broker, how can he
or she be sure the broker is doing exactly what was
requested?
2. Even if an individual does trust a broker, it is good
business to keep a written record of all the orders
given to assist in the event that problems arise.
3. An individual must sign a contract after researching
and finding a broker, giving the broker permission to
trade commodities.
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What should be considered when
selecting a broker?
C. A main factor in selecting a broker is cost.
1. In addition to maintaining a margin requirement, an
individual must pay the broker to trade on his or her
behalf.
2. A brokerage fee is a fee charged to an individual for
each contract that is traded.
3. It is important to consider broker’s fees in addition to
interest, margin requirements, and any additional
margin that may have to be paid if the market shifts.
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What should be considered when
selecting a broker?
D. The length of time in the profession is important
when selecting a broker.
1. If a broker is part of a firm, it is important to check
references of the firm. People can contact the
Commodity Futures Trading Commission, which
is the federal regulatory agency for all futures and
options contracts traded on organized exchanges.
2. Every year millions of dollars are lost by traders
because of the faulty operations of corrupt individuals.
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How can various types of orders
be placed?
Different kinds of orders can be placed with a
broker, such as market orders, price orders, stop
orders, and stop close only.
A. A market order is filled promptly at the current
price. This occurs once the broker has been
contacted for the order to be placed.
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How can various types of orders
be placed?
B. A price order is to sell once filled at the stated price
or above. This occurs once an individual instructs the
broker to place an order at a certain price.
C. A stop order is to sell once filled at the stated price
or below. This occurs once an individual instructs the
broker to place an order at a certain price level.
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How can various types of orders
be placed?
D. Sell stop orders are below the market, and buy
stop orders are above the market.
E. A stop close only is to be filled at the close of
trading.
F. The language used during the placement of orders to
a broker must be made accurate and clear. It is
important to use simple language to avoid the
unexpected.
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What is the role of a performance
bond deposit and bond calls?
Performance bond deposits and bond calls
A. A performance bond is funds deposited by the
customer, broker, clearing member, or clearinghouse.
1. These funds act as a guarantee that an individual will
honor the commitments made in the futures contract.
2. The role of a performance bond allows for assistance to
ensure the financial integrity of brokers, clearinghouse
members, and the exchange as a whole.
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What is the role of a performance
bond deposit and bond calls?
B. A performance bond call (margin call) occurs
when the customer’s positions have lost money.
1. The role of a performance bond call is to increase
deposits up to minimum levels.
2. If the performance bond call is not acted upon,
contracts will be closed immediately.
3. Exchanges do not allow trade debts to occur in the
futures market.
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Review
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Name some marketing tools that can be used to
reach maximum profit.
What are the factors to consider when choosing a
broker?
What does the Commodity Futures Trading
Commission do?
Describe the types of orders learned in this lesson.
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